The first few steps in starting any kind of business involve finding out the product and target market to promote the product to. At the same time, an important decision that needs to be made is regarding the type of company to be established.
This is where many people are overwhelmed and confused. And most often, one of the main causes of confusion is the lack of understanding between LLC and LLP companies.
By definition, LLC, which stands for Limited Liability Company, is a separate business entity that combines the limited liability privileges of a registered company company and the tax benefits enjoyed by a partnership company. It can have one or more members, and that is something small businesses and startups usually choose to do.
LLP, which stands for Limited Liability Partnership, is basically a general partnership which combines the benefits of a corporation and a partnership as well. It is registered as a separate business entity. As a result, it is understandable why people might get confused between the two.
Here are the main points of difference.
Liability Protection
While LLCs and LLPs each provide limited liability protection to their members and partners, there are some technical differences. Protection is not completely the same in both cases.
For an LLC, members are protected from personal liability for any debt or business claims. This basically means that creditors or other people to whom the company owes can’t file a lawsuit against any of the members for their debts. Members are only responsible to the extent of their personal investment in the company.
However, for LLP, the partners are personally liable for their respective negligence. This means that they will not be held responsible for the mistakes of the other partner. Or in other words, they have liability protection from mistakes made by other partners. Their risk is only limited to their capital investment in the company.
Management structure
In terms of management and composition, an LLC may have only one member or more than one member. An LLP, on the other hand, must have at least two partners.
In addition, an LLC is managed and bound by operating agreements made by its members. It usually contains the financial composition of the company, along with the contributions of each of its members, details of the distribution of profits, and the like. It also regulates who can make management decisions in the company.
Members can choose to involve all members in management or can assign one manager to make decisions for the company as well.
In the case of an LLP, its management is governed by a partnership agreement made by the partners. The general rules of any partnership agreement apply here.
The main thing is
For limited liability benefits and tax considerations, most small businesses register themselves as LLCs. However, based on the state of operation, tax laws may vary unfavorably for an LLC, which should be considered. However, for a professional group of at least two people, an LLP may be a better choice.